Inadvertent Terminations

Internal Revenue Service
Number: 201744013
Release Date: 11/3/2017
Index Number: 1362.04-00, 1361.03-03
Department of the Treasury
Washington, DC 20224
Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
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LEGEND
Telephone Number:
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Refer Reply To:
CC:PSI:B01
PLR-112454-17
Date:
July 19, 2017
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X =
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A = ---
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Trust =
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Date 1= ---
Date 2= ---
Date 3= ---
Date 4= ---
Years 1= ---
Years 2= ---
State = ---
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$a =
PLR-112454-17 2
Dear ---:
This responds to a letter dated April 10, 2017, submitted on behalf of X, requesting relief under section 1362(f) of the Internal Revenue Code (the Code) for an inadvertent invalid S corporation election.

# FACTS

According to the information submitted and representations within, X was incorporated under the laws of State on Date 1. On Date 2, A transferred his X shares to Trust. A died on Date 3. S elected to be treated as an S corporation effective Date 4. At the time of the election, Trust, a shareholder of X, was an ineligible shareholder. X’s S corporation election was invalid due to the failure of Trust to file an ESBT election.
X represents that Trust has at all times met the requirements of an ESBT, within the meaning of § 1361(d)(3), except that the trustee of Trust did not make a timely ESBT election under §1361(e)(3). X further represents that Trust has not filed its income tax returns consistent with being an ESBT for Years 1.
X represents that, other than the failure to make a valid ESBT election on Date 4, X has qualified as a small business corporation at all times since its election on Date 4 and X represents that X and its shareholders have treated X as an S corporation at all relevant times. X further represents that X has filed its income tax returns consistent with having a valid S election in effect for all taxable years since X elected to be an S corporation.
X further represents that X, its shareholders, and Trust’s beneficiaries, will amend their income tax returns for Years 2 within 120 days of the date of this ruling letter to reflect treatment of Trust as an ESBT.
X represents that the invalidity of its S corporation election was inadvertent and was not motivated by tax avoidance or retroactive tax planning. Further, X represents that X and its shareholders agree to make any adjustments required as a condition of obtaining relief under the inadvertent termination rule as provided under § 1362(f) of the Code that may be required by the Secretary.

# LAW AND ANALYSIS

Section 1361(a) provides that an S corporation is a small business corporation for which an election under § 1362(a) is in effect.
Section 1361(b)(1) provides that the terms “small business corporation” means a domestic corporation which is not an ineligible corporation and which does not (A) have PLR-112454-17 3 more than 100 shareholders, (B) have as a shareholder a person (other than an estate, a trust described in § 1361(c)(2), or an organization described in § 1361(c)(6)) who is not an individual, (C) have a nonresident alien as a shareholder, and (D) have more than 1 class of stock.
Section 1361(c)(2)(A)(i) provides that, for purposes of section 1361(b)(1), a trust all of which is treated (under subpart E of part I of subchapter J of this chapter) as owned by an individual who is a citizen or resident of the United States may be an S corporation shareholder.
Section 1361(c)(2)(A)(v) provides that, for purposes of § 1361(b)(1)(B), an ESBT is a permissible shareholder.
Section 1361(e)(3) provides that an election under § 1361(e) shall be made by the trustee. Any such election shall apply to the taxable year of the trust for which made and all subsequent taxable years of such trust unless revoked with the consent of the Secretary.
Section 1.1361-1(m)(2)(i) of the Income Tax Regulations provides that the trustee of an
ESBT must make the ESBT election by signing and filing, with the service center where the S corporation files its income tax return, a statement that meets the requirements of § 1.1361-1(m)(2)(ii).
Section 1.1361-1(m)(2)(iii) provides that the trustee of an ESBT must file the ESBT election within the time requirements prescribed in § 1.1361-1(j)(6)(iii) for filing a QSST election (generally within the 16-day-and-2-month period beginning on the day that the stock is transferred to the trust).
Section 1362(a)(1) provides that except as provided in subsection (g), a small business corporation may elect to be an S corporation. Section 1362(a)(2) provides that an election under § 1362(a) shall be valid only if all persons who are shareholders in such corporation on the day on which such election is made consent to such election.
Section 1362(d)(2)(A) provides that an election under § 1362(a) shall be terminated whenever (at any time on or after the 1st day of the 1st taxable year for which the corporation is an S corporation) such corporation ceases to be a small business corporation.
Section 1362(f) provides, in relevant part, that if (1) an election under subsection (a) or section 1361(b)(3)(B)(ii) by any corporation (A) was not effective for the taxable year for which made (determined without regard to subsection (b)(2)) by reason of a failure to meet the requirements of section 1361(b) or to obtain shareholder consents, or (B) was terminated under paragraph (2) or (3) of subsection (d) or section 1361(b)(3)(C); (2) the Secretary determines that the circumstances resulting in such ineffectiveness or PLR-112454-17 4 termination were inadvertent; (3) no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness or termination, steps were taken (A) so that the corporation for which the election was made or the termination occurred is a small business corporation or a qualified subchapter S subsidiary, as the case may be, or (B) to acquire the required shareholder consents; and (4) the corporation for which the election was made or the termination occurred, and each person who was a shareholder in such corporation at any time during the period specified pursuant to this subsection, agrees to make such adjustments (consistent with the treatment of such corporation as an S corporation or a qualified subchapter S subsidiary, as the case may be) as may be required by the Secretary with respect to such period, then, notwithstanding the circumstances resulting in such ineffectiveness or termination, such corporation shall be treated as an S corporation or a qualified subchapter S subsidiary, as the case may be during the period specified by the Secretary.

# CONCLUSION

Based solely on the facts submitted and the representations made, we conclude that the failure of Trust to make an ESBT election effective Date 4 caused X’s S corporation election to be inadvertently invalid within the meaning of § 1362(f). Pursuant to the provisions of § 1362(f), X will be treated as continuing to be an S corporation beginning on and after Date 4, unless X's S corporation election is otherwise terminated under § 1362(d).
This letter ruling is subject to the following conditions: (1) An adjustment payment in the amount of $a and a copy of this letter must be sent to the following address: Internal Revenue Service, Cincinnati Service Center, 201 West Rivercenter Blvd., Covington, KY 41011, Stop 31, Terri Lackey, Manual Deposit. This payment must be sent no later than 120 days from the date of this letter; (2) within 120 days from the date of this letter, an election to treat the Trust as an ESBT effective Date 4, must be made with the appropriate service center. A copy of this letter should be attached to the ESBT election. If these conditions are not met, then this ruling is null and void. Furthermore, if these conditions are not met, X must send notification that its S election has terminated to the service center with which X’s S election was filed.
Except as specifically ruled upon above, we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the
Code. Specifically, we express or imply no opinion regarding X’s eligibility to be an S corporation.
This ruling is directed only to the taxpayer who requested it. According to § 6110(k)(3), this ruling may not be used or cited as precedent.
PLR-112454-17 5
Pursuant to the power of attorney on file with this office, we are sending a copy of this letter to your authorized representative.
Enclosures (2)
Copy of this letter
Sincerely,
David R. Haglund
David R. Haglund
Branch Chief, Branch 1
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)
Copy of this letter for section 6110 purposes